Markets Versus Governments: Political Economy of Mechanisms

Daron Acemoglu, Mikhail Golosov and Aleh Tsyvinski

No 12224, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the optimal Mirrlees taxation problem in a dynamic economy with idiosyncratic (productivity or preference) shocks. In contrast to the standard approach, which implicitly assumes that the mechanism is operated by a benevolent planner with full commitment power, we assume that any centralized mechanism can only be operated by a self-interested ruler/government without commitment power, who can therefore misuse the resources and the information it collects. An important result of our analysis is that there will be truthful revelation along the equilibrium path (for all positive discount factors), which shows that truth-telling mechanisms can be used despite the commitment problems and the different interests of the government. Using this tool, we show that if the government is as patient as the agents, the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear. In contrast, when the government is less patient than the citizens, there are positive aggregate distortions and positive aggregate capital taxes even asymptotically. Under some additional assumptions on preferences, these results generalize to the case when the government is benevolent but unable to commit to future tax policies. We conclude by providing a brief comparison of centralized mechanisms operated by self-interested rulers to anonymous markets.

JEL-codes: E61 H11 H21 P16 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pol
Note: EFG PE POL
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Acemoglu, Daron, Mike Golosov, and Oleg Tsyvinski. "Markets Versus Governments." Journal of Monetary Economics 55 (January 2008): 159-189.

Downloads: (external link)
http://www.nber.org/papers/w12224.pdf (application/pdf)

Related works:
Working Paper: Markets Versus Governments: Political Economy of Mechanisms (2006)
Working Paper: Markets Versus Governments: Political Economy of Mechanisms (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:12224

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12224

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().